Health-service finances

Plugging the hole

Getting rid of the deficits will be politically tricky

AMID plenty, the National Health Service has contrived to get its finances into a remarkable mess. Despite years of record funding increases from a bountiful Labour government, the NHS in England amassed a net deficit of £570m in 2005-06. The embarrassment has been acute, the political pressure to staunch the financial bleeding intense.

Patricia Hewitt, the health secretary, has already come close to putting her job on the line if the NHS does not return to financial balance in 2006-07. This week David Nicholson, the health service's new chief executive, said that the NHS would achieve a surplus of at least £250m in the following financial year.

That may seem an undemanding objective set against a budget that will increase by 9% to £92 billion in 2007-08. But the net deficit in 2005-06 hid a much bigger gross shortfall of £1.3 billion among a third of the 600 NHS organisations in 2005-06, which was partially offset by surpluses in the rest of the health service. That gross deficit is expected to decline to only around £1.2 billion in 2006-07.

Most of this year's improvement in the net balance is thus coming from higher surpluses rather than smaller shortfalls. That in turn owes much to savings across the NHS, such as big cuts in spending on education and training, which MPs on the House of Commons health committee condemned as “unacceptable” on December 13th. The government is cagey about next year's gross deficit, saying only that there will be “a significant reduction”.

Just why so many NHS trusts lurched into deficit when they were being showered with money remains a matter of controversy. A big overrun on pay is clearly part of the reason. Pay rises absorbed 47% of the increase in the NHS budget in 2005-06. The government badly miscalculated the cost of new staff contracts, which exceeded estimates by £560m.

Local managerial failings also played a role. A welcome move towards greater financial transparency brought these more into the open. In recent years the NHS has sought to abolish the old tricks that were used to hide deficits, such as letting a trust meet a revenue shortfall through a transfer from its capital account.

One accounting reform has been less helpful, however. Under a government-wide change applied to the NHS from 2001-02, any hospital trust that chalks up a deficit gets that money taken away from the following year's budget. This is a double blow to its finances, since it must generate the surplus to repay the deficit with less revenue. If it succeeds, then the withheld revenue will subsequently be returned; but if it fails, then the deficits can get worse and worse. Mr Nicholson said on December 11th that this rule would probably be dropped next spring provided that the NHS gets back into net balance.

That will help the trusts with the worst deficits, such as the Queen Elizabeth in south-east London. More generally, the NHS will benefit from greater stability in pay rates and a clampdown on hiring, which had run ahead of plans. But some trusts will still be left in financial difficulty next year, according to the health committee's report.

One possible cure is for them to merge with stronger organisations. The Heart of England foundation trust (a more independent kind of NHS hospital), based in Birmingham, got ministerial approval on December 12th to consult the public on its plan to take over the neighbouring, financially troubled Good Hope hospital. Bill Moyes, executive chairman of Monitor, which regulates foundation trusts, says this is the first takeover within the NHS on commercial terms. It may point the way for other strong trusts to pull up standards in failing hospitals.

In some bits of southern England, such as Surrey and Sussex and parts of London, more fundamental change is needed in order to reduce excess capacity. Sometimes this will involve a closure as a number of activities are concentrated on one site. More often it will require scaling down activities in some of the hospitals, such as the closing of maternity wards and accident-and-emergency units.

The government is trying to argue the case for these “reconfigurations”, which could affect as many as 60 hospitals, on grounds of patient safety. Roger Boyle, the national director for heart disease and stroke, recently argued, for example, that stricken victims would be more likely to survive in specialist centres than in a local emergency department, even if it involved a longer journey.

The plans to restructure hospital services, which have sparked many local protests—supported in a campaign by the Conservatives—are still likely to be seen largely as a response to the deficits, however. At present, the government is saying that it will tough out the opposition. But it will be no great surprise if it beats at least a partial retreat and limits the reconfiguration proposals to a politically more digestible number.